Impact of Growth on Factor Endowment and Structure of India’s Trade

Abstract

The paper aims at empirically validating the inter relations between changing factor endowment, structure of trade and Indian economy. Heckscher-Ohlin theory of international trade envisages that a country specialises in the production and export of such goods as conform to its factor endowment. It generally imports goods, the production of which does not conform to its factor endowment. The theory, like the classical comparative cost theory, uses static analytical framework. Among others, an assumption of the theory is that the factor endowment does not change, and therefore, the pattern and composition of its trade remains stable. Classical and neo classical theories also assumed that such factors of production as land, labour and capital are immobile between countries but mobile within countries. Goods are, however, assumed to be totally mobile both within and between countries. An implication of the assumption is that the relative supply of labour and capital cannot be altered by imports and exports of these factors. This assumption also implicitly rules out the pattern of growth to alter factor endowment of the economy. Economic growth, however, leads to the transformation of not only the pattern and structure of production but it also transforms factor endowment. It brings about drastic changes in the quantum, pattern and structure of international trade of an economy. Even if the pattern of trade and factor endowment were initially consistent with each other, these will diverge with each other as a consequence of growth. Factor endowment also changes with growth and developing economies focus mainly on industrialisation. Imports of goods in the early stages of growth are replaced by domestic production and some of these goods enter even export basket thus initial factor endowment will guide the import of capital intensive goods, special capital goods and export of labour intensive goods in the initial phase of growth . This argument forms the basis of this paper. The main hypothesis of investigation in this paper is that there exists an interrelation between changing factor endowment, changing pattern of trade and the production structure of a developing economy like India. The past factor endowment governs the current exports structure and the current exports structure governs the future factor endowment of the country and